UPDATE 1-ECB's Praet says Italy must stay on path to lower debt- paper

Sun Dec 22, 2013 6:07am EST

* Italian recovery fragile, risks remain - Praet

* Govt can not afford slippage on public accounts - Praet

* Spending on investments will pick up in 2014 - Praet

ROME/MILAN, Dec 22 (Reuters) - Italy must keep its public accounts in check and stay on its planned path to lower debt as its economy shows signs of emerging from recession, European Central Bank Executive Board member Peter Praet said in interview on Sunday.

Praet said there was still risk of another slowdown in the euro zone's third-biggest economy if economic reforms were not brought in.

"To stay on a sustainable path, it's essential that the government maintain its commitments," the economist told Italy's La Stampa newspaper. "You cannot afford any slippage on the public accounts."

Praet said fundamental issues such as labour market flexibility and bureaucracy had to be addressed, particularly in an economy that included a large number of small businesses.

"The cost of labour is too high," Praet said. "That is not to say wages are too high - in fact they are low on average, compared with many other countries. The problem is that productivity has grown too little."

Praet also said the ECB was ready to act if banking credit dries up and threatens a recovery in the euro zone, although he added that the outlook for investments in the region was improving.

"We think that spending on investments will start to pick up in 2014," he said.

Asked how he would respond to those who proposed leaving the euro as an option for Italy, Praet said discussions about abandoning the single currency "do not reflect reality".

Italy's economy remained flat in the third quarter after two years of contraction, but a spokesman for national statistics bureau ISTAT said earlier this month that was insufficient to show the recession was over.

Before rounding, GDP showed another marginal decline between July and September, he added.

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